Suppose that the demand for a good is given by the inverse demand function p = 10 - 3q while the supply of the good is given by the inverse supply function p = 2 + 2q.
a. Plot the demand and supply functions on a graph.
b. Set the two price equations equal and solve for the equilibrium quantity.
c. Using the equilibrium quantity, determine the equilibrium price.
d. Now suppose that a unit tax of 1 is imposed, shifting the supply curve upward, increasing the intercept by 1 unit.
e. Re-compute the equilibrium quantity and price and determine the incidence of the tax. Explain who bears what shares of the tax.
f. Calculate the elasticities of demand and supply at the original equilibrium point (before the tax) and describe the relative elasticities. [Recall that the elasticities are given as: (1/slope)(p/q).]